The Reserve Bank of New Zealand (RBNZ) has released revised principles for its Insurance Solvency Standards review that it says are more “fit for purpose” following feedback from the industry and other groups.

The principles canvassed in a consultation included international comparability, the role of capital in absorbing an insurer’s losses, balance sheet risks and practicality.

“As a regulator, the Reserve Bank needs to balance soundness with efficiency and support confidence in the sustainability of the sector,” Deputy Governor and GM of Financial Stability Geoff Bascand said. “Our approach is risk based and does not intend to provide for a zero-failure regime.”

Feedback suggested changes to better reflect differences between banks and insurers and the business model of risk sharing.

Changes to Principle 3 include a clarification to say capital must be of sufficient quality to enable insurers to meet obligations to policyholders, deleting words saying capital must “readily absorb losses before losses are imposed on policyholders”.

“Most submitters commented that there was a difference between losses occurring in the normal course of running a business, and extraordinary losses, for example during an insolvency or extreme event,” a feedback document says.

In other changes, Principle 4 now says “the quantum of capital requirements” should be set in relation to material risks that may impact the insurer’s ability to meet obligations “to policyholders”, rather than highlighting balance sheet impacts.

The RBNZ says review implementation timelines acknowledge the strain on resources in the insurance industry in balancing regulatory reforms with COVID-19 responses.

An interim standard is currently due for release at the end of this year, while some insurers won’t be adopting new international accounting standards until 2024.

“In undertaking the review, we will aim to achieve as much consistency as possible between Reserve Bank-regulated sectors, while taking into account characteristics that are unique to the insurance sector,” the document says.